Why investing in digital is the smart choice ahead of a recession

When the effects of a prolonged economic slump set in, it can be tempting to draw down investment. But, in a digital age, is this the safe bet it once seemed?

Economic realities are biting hard across all sectors of business. Consumer confidence has cratered and will continue to do so in 2023 as everyday people shore up their finances against a battering of high interest rates and even higher household bills. 

And, soon enough, businesses will feel the full effects of these trying times. A coalition of decreased demand, higher overheads and lower margins will see many cutting back on staffing to fit the economics of the day.

EY’s latest forecast indicates that GDP could drop by 0.7% this year in the UK – more than double the analysts’ previous predictions. Now, the firm’s estimates put average inflation across 2023 at an eye-watering 7.2%.

Against this fraught financial backdrop, decision-makers may be tempted to hunker down and pare back costs. But that can be self-defeating, advises Michael O’Donnell, senior analyst at Quest. 

O’Donnell recently spoke with a former colleague Sam, now a financial controller at a large IT hardware company. He asked Sam what he would do given the present market conditions. His answer? “Invest in digital,” he says. “Always invest in digital.”

That’s the case almost regardless of sector, O’Donnell explains. ‘If you’re a manufacturer making widgets, wouldn’t you invest in additional raw materials or equipment?’ he asked Sam. “No, invest in digital all the time because raw materials don’t fluctuate all that much,” O’Donnell recalls his friend saying. “It’s an overhead, whereas investing in digital will last you at least five years with wider organisational benefits.”

Of course, there are nuances, but the point Sam makes is valuable. Business leaders often find it tricky to commit to long-term investments amid a short-term crisis, particularly when the balance sheet is focused on the here and now. But it can be a boon for those brave enough to step outside the day-to-day challenges of running a company during an economic downturn.

McKinsey believes that 30.5 million UK workers will lack the full suite of skills they will require to perform their jobs in 2030, with most of the shortfall in knowledge coming in digital. And, in a digitally-driven work-from-anywhere world, this issue is not backing down.

It’s become eminently clear that such a large proportion of the workforce lacking the requisite skills will be bad for businesses - and the economy. The digital skills gap currently costs the UK economy an estimated £63bn per year in lost potential GDP, according to the government, and the gulf is only expanding.

Part of the problem is that future workplace needs are not commensurate with the level of education provided to those entering the workforce. Employers report that less than half of people leaving full-time education have the advanced digital skills required to grow their businesses.

Prior precedent suggests that bold investment decisions – particularly in the digital space – can reap dividends in the long run. Brave businesses chose to do this during the pandemic when budgets were equally tightened, and the future seemed similarly uncertain. Two-thirds of companies surveyed by McKinsey increased their funding of digital and technology initiatives in 2021. Meanwhile, 44% increased the number of roles in tech and digital roles in the same year, despite a similar proportion decreasing the number of jobs available more generally.

According to O’Donnell, the fast-moving job market is another reason to invest in digital right now. Rising inflation, challenging economic circumstances and competition in the job market mean it’s a mixed bag out there for employers.

Some sectors have seen cutbacks recently, but talent shortages also exist. Employees can simply up sticks and move elsewhere if they need to boost their salary – with some success. A 2021 Microsoft survey found that four in ten employees were considering leaving their current role, and a recent survey conducted by EDB gives some clue as to why.

First and foremost, people want to be paid better. Of the respondents who were looking for roles outside of their current organisation, pay and benefits were a significant factor for 46.3% of people.

“With respect to attrition as opposed to cutbacks, people are leaving to try and counteract really high inflation and flat yearly pay rises,” says O’Donnell. “The problem there is you’re losing that ‘know-how’ or that tacit knowledge, so organisations need to keep their good people. Data and people are your most important resources,” he explains. “Coming into a downturn, you invest in digital because you have to do more with less.” Futureproofing operational resilience is a must-do at any time but becomes doubly important during an economic downturn.

Beyond that, that same survey supported the idea that investing in digital creates a halo effect which bolsters employee retention. A third of tech respondents said they were looking to work elsewhere because they wanted to work with cutting-edge technology. “That’s their nature. They want to grow and hone their skills but also try out new technology and see what it can do,” says O’Donnell. Being business forward on digital can be a crucial point of differentiation, attracting new workers and keeping the pastures green for existing staff.

Fumbling on retention will be a big issue for businesses down the line. Not only will organisations lose critical institutional knowledge, but the impact on the bottom line could be devastating. Replacing staff is a costly enterprise that has wider-reaching ramifications than simply the disruption to business as usual. The Financial Services Skills Commission and PwC calculate that firms can save £49,100 per employee by retaining and reskilling staff rather than seeking and hiring a replacement.

Similarly, McKinsey data suggests that in most cases, upskilling staff to meet the market need makes more economic sense for UK employers than letting them go and hiring someone else into the role. The data shows that large enterprises can gain a 43% yield payoff from upskilling their employees, while SMEs can benefit to the tune of 30% yields.

In technology, moving from one company to another company and then back again is nothing new. “Securing a new hire as backfill can take three months,” says O’Donnell. “On top of that, it could be at least six months until that new hire is really bedded into the company, knowing how it works, and providing value. That’s a nine-month period before you’re getting any significant returns.” 

There is still fierce competition for top talent, and all of that can be avoided by working with employees, addressing their professional development needs and upskilling workers where they want it.

Even then, O’Donnell is conscious that for businesses looking at the bottom line here and now, the threat of a looming recession can often give people pause before any outlay. Yes, the data may indicate that businesses that invest in digital now will benefit in the long run, remaining relatively unscathed by the broader effects of the downturn. But to get to that point, you must survive the initial economic battering.

This requires confident, smart and sustainable planning. “There are opportunities everywhere,” says O’Donnell. “Recession doesn’t limit the opportunity.” Far from it: “Recession brings opportunities,” he says. For one thing, recession brings the benefit of bouncebackability for those companies that are prepared to throw down the gauntlet. Aptly meeting the moment puts these organisations in a better position to seize greater opportunities when the market shifts back into positive territory, consumers ramp up their spending, and more money flushes through the economy. Weathering the storm is one thing, but high-performers will use choppy waters to chart a new course.

Digitally-savvy leaders are making the bold decisions now that can put them on that firm footing in the future, bringing their colleagues and boards along with them. Many are making the convincing economic case that investing in upskilling and tech tools to support staff will allow them to financially outperform competitors and industry heavyweights in the future. 

Two-thirds of top digital leaders are investing in the cloud, according to PwC, compared to just one-third of other executives. Now, 40% of digital-first leaders are adopting new technologies internally to supercharge their growth when the economy changes, compared to just 25% of non-digitally-minded executives.

Competing in a complex digital ecosystem

Even in tough economic times, the benefits of embracing digital are clear. Take a business that moved from bricks and mortar to online, O’Donnell suggests. “Firstly, great that they moved online and they’re taking the opportunity to tackle a larger market compared to the traditional bricks and mortar,” he says. “But supporting online ecommerce brings its own complexities.”

This hypothetical business now sells multiple products to multiple countries through various online marketplaces like Google Business Merchant, Amazon, or Shopify. They no longer need to manage a single product list with one price column and one VAT column. They’re now managing multiple product lists with multiple currencies, VAT, and file structures for each marketplace that change for each country. 

Not only that, but in a manual process, it’s often the case that a file transfer will be corrupt, resulting in products being listed incorrectly with incorrect prices and stock levels. Now more than ever, businesses are more sensitive to these discrepancies which can be a major burden for companies without proper workflow automation.

“Organisations that have not moved online are already dying, and those that are not automating these workflows are losing to their competitors who have already taken that step, become more efficient, and created space to tackle more growth opportunities,” says O’Donnell.

It’s a simple example but one that a real-world company can help with. O’Donnell points to Productsup, a German company that enables brands and manufacturers to sell more products on all global marketplaces. They offer a solution to remove the chaos introduced with online ecommerce, ensuring quick product onboarding and error-free high-impact product listings.

Carving out a sensible, ambitious, but achievable digital budget can signify to your board that you’re conscious of the current challenges while being hopeful for the future. Such an approach also suggests to workers that you’re mindful of the long game and that the business is one in which they can thrive as well as survive.

It’s about instilling a culture of resilience: of operations resilience, of cyber resilience, and data resilience. “If you look at the technical term of resilience in the IT space, it talks about providing a service despite the threat, or recovering quickly,” says O’Donnell. But too often, visions of resilience prioritise ironing out infrastructural issues over people.

While businesses should be considering digital investments like digitalisation, automation or improving an ecommerce workflow, they mustn’t overlook the people and processes behind those systems. Without this, organisations could lose sight of how knowledge is transferred to remove single points of failure.

“We’re a technology company and our business is to provide tools that get more from data like data insights but protecting that data too. But this isn’t about our offering. We’re seeing it across the board that the skills shortage and the fierce competition for top talented people has a major knock-on effect on an organisation’s ability to respond quickly to opportunity or threat,” says O’Donnell.

O’Donnell is a senior analyst for a company that sells products designed to streamline IT operations and cybersecurity, so his advocacy for investing in digital and automation is understandable. But what O’Donnell makes clear is that resiliency is about more than technology. He says: “It’s know-how and tacit knowledge, and that takes time to build within a person or team.”

The nature of cascading events makes it hard to predict when and where the next domino will fall. O’Donnell believes that in the technology space there are still significant skills shortages. He suggests that companies continue to invest in technology to build resilience, but also to improve employee attrition. 

The skills shortage is contributing to the need to automate within IT operations and investing in digital at a time of recession is now more necessary than ever. Businesses must walk the fine line between ‘doing more with less’ and ‘digitalisation’ while also maintaining valuable institutional knowledge by keeping experienced employees in the fold. 

“In my business area we provide a full suite of tools to ensure your databases run healthily and the systems they support are performing or don’t fail resulting in an outage,” says O’Donnell. “But without people, you have nothing. To really improve your chances when faced with a threat you need that person with the experience and knowledge of what’s causing the problem and its solution.”

For more information, visit quest.com